A Step-by-Step Guide to Disability Income Insurance
From Here to Security SM
Everyone is looking for an edge.
You work hard to get that edge – for you and your family both today and
tomorrow. We know it isn’t simple. The road to financial security is long and full
of challenges, opportunities and surprises.
But what would happen if you became too sick or too hurt to work? Would you
have enough income to maintain your lifestyle and protect your family’s future?
For many people, the answer is “No.”
That’s why we wrote this book. It’s based on the ideas and experiences of our
financial representatives across America, not to mention more than 125 years of
Principal Life Insurance Company service to business owners, employees and
It’s designed to simplify and demystify the rules of the road to financial security.
Along the way, we’ll help you discover how disability income insurance can help
you achieve your goals – whatever they might be.
Here’s to enjoying the journey!
1: Understand the need 4
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During a prolonged illness or injury, you could lose your income and everything it
provides. What are the odds it could happen to you? And what can you do about it –
2: Understand disability income insurance 18
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Discover how disability income insurance helps protect you and your family. Then use
our step-by-step worksheet to calculate how much you may need.
3: Review your plan regularly 28
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Because change is the one great constant in life, you should review your objectives
and your plan at least once a year.
4: Glossary of insurance terms 30
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In the last 10 minutes, 390 Americans
– National Safety Council, 2001
In the home a fatal injury occurs every 16 minutes
and a disabling injury every four seconds.
– National Safety Council, Injury Facts®, 2004 Edition
There is a death caused by a motor vehicle
crash every 12 minutes; there is a disabling
injury every 13 seconds.
– National Safety Council, Injury Facts®, 2003 Edition
Nobody wants to think about it, but you must take
steps to protect your family and your future from
what might happen if you become disabled and
could not work.
It won’t happen to me
The truth is that during the course of your career, you are three and
a half times more likely to be injured and need disability coverage
than you are to die prematurely and need life insurance.
– Health Industry Association of America, 2000
As the following chart illustrates, deaths have decreased while disabilities are up dramatically.
For example, the numbers of deaths due to hypertension have decreased by 73%, yet
disabilities due to hypertension have increased 70%.
Hypertension Heart Disease Cardiovascular Diabetes All four
Source: National Underwriter, May 2002; The JHA Disability Fact Book – 2003/2004
Edition – Need for Disability Insurance
Understand the need
In the last 20 years, deaths due to the “big three” (cancer, heart
attack and stroke) have gone down significantly. But disabilities due
to those same three are up dramatically! Things that used to kill,
– National Underwriter, May 2002
Smooth the road to financial security
Recent years have hurt more than helped the financial security of most Americans and their
families. Savings are low. Personal spending continues to rise, hand-in-glove with consumer
debt. Consumers continue to pile on debt and have established a new consumer debt
record of $1.76 trillion.1
When it comes to financial security, we are our own best friends – or our own worst
enemies. The choice, for better or worse, is always ours. Through careful planning and
follow-through, achieving financial security and protecting our lifestyle is within our reach.
Does your lifestyle depend on your income?
Would you be able to maintain your standard of living if you were too sick or hurt to work?
Probably not. Even if you have a spouse who works, could your spouse’s income alone
support the whole family? And what would happen to your savings? To your retirement
plans? To your children’s opportunity for a college education?
Safemoneyreport.com, July 9, 2003
4 RESOURCE Try our easy-to-use insurance need calculator. Visit www.principal.com/disabilitysecure.
What is your most valuable asset?
Your home may be your biggest asset, but your ability to
work and earn an income is your most valuable asset.
Motor Trend, January 2005
www.investmenttools.com, May 2006
Projected cumulative income, 35-year-old earning $3,000/month assuming 4% annual increase to age 65.
There are many components to financial security, but income is the most important of all.
Use the chart below to estimate how much you’ll earn between now and age 65. Then
consider all the things that income will buy – your home, your cars, your food, college,
vacations, basically your lifestyle – now and in the future.
Protecting your income allows you to continue to enjoy what it pays for, from now through
your retirement years.
What is your earning potential?
Potential Earnings to Age 65 (with 5% annual salary increases)
ANNUAL INCOME $50,000 $100,000 $150,000
Age 30 $4,516,000 $9,032,000 $13,548,000
Age 35 $3,322,000 $6,644,000 $9,996,000
Age 40 $2,386,000 $4,773,000 $7,159,000
Age 45 $1,653,000 $3,307,000 $4,960,000
Chapter 1: Understand the need 5
What are the chances of having at least
one disability lasting three months or longer before
reaching age 65?
Source: Commissioner’s Individual Disability Tables, CSO
Think about your personal financial situation
Are you saving enough for retirement? Would your family be able to financially survive
without your income? If the answer to these questions is “no,” you’re not alone. The fact is,
fewer and fewer Americans are setting aside enough money to achieve their financial
objectives – let alone protect what they already have.
The good news is that you can take control of your personal financial situation –
Protect your most valuable asset
Insuring your income could be the most important thing you ever do. It’s natural to insure
your home, your car and other valuables. Why not protect the funds that provide those
items – your income?
6 RESOURCE Try our easy-to-use insurance need calculator. Visit www.principal.com/disabilitysecure.
A serious disability can last a long time
When a disability lasts a long time, the financial loss it creates can significantly affect your
family’s lifestyle and future security.
That’s why disability income insurance is one of the most important components of any
financial plan. It can help assure that you and your family will have the income you need to
live on – and that your retirement savings will continue to grow.
If the disability has lasted one year, what is the
probability the disability will last:
AGE 25 AGE 35 AGE 45 AGE 55
1 more year 67% 76% 79% 81%
2 more years 57% 67% 72% 73%
5 more years 47% 57% 62% 62%
Disability plays no favorites.
Source: Commissioner’s Individual Disability Tables, CSO
The causes of disability may surprise you. Here’s a typical breakdown (by percentage of claims) of
some typical reasons an individual may become disabled:
Mental & Nervous
Source: Principal Life Adjustable Disability Insurance claims incurred as of June 1, 2005.
The above is for illustration purposes only and is not intended as an inclusive representation of all claims.
Chapter 1: Understand the need 7
How solid is your financial foundation?
How would you replace your lost income or the loss
of your ability to continue saving for your future?
Your income is the foundation of your financial plan. It’s what makes everything else possible.
So just as you protect yourself against unexpected property damage, medical expenses and
loss of life, you should also protect yourself against loss of income due to disability.
Group long-term disability insurance
If your employer offers a group long-term disability (LTD) insurance program, it may replace a
portion of your income should you become too sick or hurt to work. This is a valuable benefit
and good safety net, yet because the benefits are often taxed, some people find their group
LTD benefits may not be enough.
If you become disabled, you may be eligible for Social Security benefits, though more than
half of all claims submitted to Social Security are denied.1 To be considered disabled under
Social Security, you must have a physical or mental impairment that prevents you from
engaging in any substantially gainful activity. Plus, the disability must last or be expected to
last at least 12 months or be expected to result in death.
Social Security Forum, Volume 21, No. 5 - May 1999 (for fiscal year 1998).
8 RESOURCE Try our easy-to-use insurance need calculator. Visit www.principal.com/disabilitysecure.
If your claim is approved, there is a six-month waiting period before benefits will begin.
Benefits typically replace only a fraction of pre-disability income.
If your disability results from a work-related illness or injury on the job, you may be eligible
to receive benefits from your employer’s workers’ compensation insurance. Coverage and
benefits vary from state to state.
Even if you regularly save 10 percent of your income, one year of disability could easily wipe
out many years of savings.
CAN YOU LIVE ON 42%
What bank would lend you money if OF YOUR INCOME?
you were too sick or hurt and could
Individual disability income (DI) insurance
can help supplement your group LTD
insurance benefits to better meet your
income replacement needs.
Could you maintain your standard of
living without placing additional strain on
yourself and your family?
Individual disability income insurance
An affordable personal policy could
provide you with a monthly benefit
that is income tax free when you pay
Chart based on $6,250 gross monthly income
($75,000 annual), with 60% group LTD
insurance, assuming a 30% tax bracket for
Federal, State and FICA.
Chapter 1: Understand the need 9
Nearly half of the one million Americans who filed for bankruptcy
protection in 1999 did so after being sidelined by an unexpected
illness or injury.
– New York Post, April 3, 2000, “There’s No Insuring
You Won’t Go Bankrupt”
Are you neglecting your income protection needs?
The vast majority of Americans are choosing, consciously or subconsciously, not to purchase
individual disability income insurance – which is unfortunate. If they only knew there are
simple, affordable solutions to fit just about every need and budget. Your situation is unique,
your future one of a kind. That’s why disability income insurance can be tailored to fit
During a prolonged illness or injury, you can lose your income – and everything it provides.
Disability income insurance provides peace of mind – knowing that if you become too sick
or hurt to work, your benefits could help maintain your current lifestyle.
10 RESOURCE Try our easy-to-use insurance need calculator. Visit www.principal.com/disabilitysecure.
The time to take action is now
Why not contact your financial professional to discover how much disability income
insurance you need and how much it might cost? Then you’ll be in a better position to
make educated choices about your coverage.
TOP 5 REASONS NOT TO BUY DISABILITY INCOME INSURANCE
Social Security will take care of me.
Fact: Social Security initially denies about 65 percent of all disability claims.1
I expect to stay healthy.
Fact: Statistics show that 17% of individuals ages 21 to 64 have a disabling illness.2
It costs too much.
Fact: The average annual cost is typically one to three percent of what you earn.
I can always do it later.
Fact: People usually don’t get healthier as they grow older, and coverage will cost more.
I can rely on my savings.
1 Fact: Even if you save 10 percent of your salary, a one-year disability could eliminate
many years of savings.
Now let’s take a look at some examples of four typical families – the Singles, the Youngs,
the up-and-comers and the 40-somethings.
Each family is at a different stage in life. They have different needs, different incomes, different
goals and different opportunities. Yet each family can benefit now by working closely with their
financial representative – and by making educated decisions about their current and future
Social Security Forum, Volume 21, No. 5 – May 1999 (for fiscal year 1998)
U.S. Census Bureau, “2000 Census of Population and Housing”
Chapter 1: Understand the need 11
Meet the Singles!
With no spousal income to fall back on, we may have the
greatest need for disability income protection.
Some people are single by choice. Others have lost a spouse, either through death or
divorce. Many are single parents. Some are empty nesters. But all share a common concern.
Since they have only one income to rely on, they have an even greater need to protect their
income and their ability to save for retirement in the event of a disability.
If you’re single, there’s no better time than now to make a complete review of your financial
situation, including short-term goals, insurance policies, savings and investments. Make sure
you’re taking full advantage of your benefits at work. Compare your possible resources
with current monthly expenses. The worksheet on pages 22-24 will guide you through
In 2004, the average American household spent $2,434 on dining out.
– U.S. Department of Labor Consumer Expenditure Survey
12 RESOURCE Try our easy-to-use insurance need calculator. Visit www.principal.com/disabilitysecure.
Meet the Youngs!
We’re a new family (and we’re just getting by). We can’t afford to get started.
The Youngs might be surprised to discover how little they need to set aside each month to
achieve and protect their long-term financial goals. Premium rates for disability income
insurance are usually lower for policies purchased at younger ages. So the Youngs can
purchase a small, affordable policy now. Then later, as their income grows, they may be
able to adjust their policy to increase coverage.
Contrary to popular belief, the Youngs shouldn’t have to give up something to protect
their income. Quite often, extra cash can be created simply by reviewing and improving
personal money management habits. Are they paying too much for their mortgage or their
home and auto insurance? Are they paying the lowest possible rate on their credit cards?
Think about it. How much extra money could you create, each month, if you were able to
find simple expense-saving opportunities?
Chapter 1: Understand the need 13
Meet the up-and-comers!
The kids are growing fast (and so are our careers). How should
we deal with our changing lives and objectives?
As your family and careers grow, so should your plan for financial security. Ask yourself the
• Are you taking full advantage of your benefits at work?
• Are you setting aside a portion of your growing income to help protect your future
• As you buy larger homes, accumulate greater assets and dream bigger dreams, are you
taking steps to protect your family and assets should you or your spouse become too sick
or hurt to work?
• Are the policies you bought years ago still adequate?
• Have you thought about how a disability could impact your ability to save for retirement?
Use the kids’ preschool and grade school years to build your financial security foundation.
Ask your financial representative how to create affordable base levels of protection.
As children grow older (and you begin to enter your peak earning years), the thoughts of
most parents turn to empty-nesting and retirement. This is a time when income protection
is often essential to help ensure you will not have to spend your retirement savings because
of a disability. The closer you get to retirement, the more accurately you can forecast your
specific income needs and opportunities. It’s the best time to fine-tune your strategy for
personal financial success.
14 RESOURCE Try our easy-to-use insurance need calculator. Visit www.principal.com/disabilitysecure.
Meet the 40-somethings!
The kids are teenagers and our peak earning years lie just ahead.
How can we make the future we’ve dreamed of come true?
The next 20-some years are likely to be the most busy and exciting years of your lives. They
are the years when your income is likely to be highest. You’ll be able to afford traveling with
your family to the places you’ve always wanted to see. It’s when you’ll want to take up new
hobbies, start thinking about grandkids and more. The next 20 years will also be critical
years for building your retirement savings.
That’s why it’s even more important to protect your income now! By doing that, you’ll be
protecting the lifestyle you’ve worked so hard to achieve. You’ll be protecting your ability to
continue saving for retirement. You’ll be helping to make sure your dreams come true.
Chapter 1: Understand the need 15
Insurance is too expensive
Disability income insurance solutions are available to suit nearly every need and budget.
That’s why it makes sense to work with a financial representative who can tailor a program
to satisfy your personal situation and objectives.
A healthy 35-year-old male making $75,000 a year can buy disability income insurance that
would pay an after-tax benefit of $3,925 per month to age 65, should he ever become too
sick or hurt to work. The best part is he could buy that coverage for less than two percent of
his annual income!1
Whether your goal is maximum income protection, safeguarding specific expenses
(mortgage), or budget-based coverage – a disability income insurance policy can
be designed to meet your needs.
Think waiting to buy disability income insurance makes sense?
Most people save nothing by waiting to buy disability income insurance – yet they risk
becoming disabled before they buy.
DISABILITY INSURANCE PREMIUMS
AGE 30 AGE 35 AGE 40 AGE 45 AGE 50
$25.31 $29.26 $39.02 $48.53 $58.97
Assumptions: $1,000 monthly benefit, Iowa resident, male, occupation class 4A, non-smoker, 90-day
elimination period, benefits paid to age 65, To Age 65 Your Occupation Period, and Residual Disability
Benefit rider. See glossary of insurance terms on pages 30-33 for more information. Policy form HH 750.
Rider form HH 758.
Disability income insurance calculations are based on a variety of factors. Disability income insurance
also has limitations and exclusions. For specific costs and complete details of coverage, contact your
This chapter helps demystify disability income insurance. It includes
an easy-to-use calculator tool for determining how much disability
income insurance you may need.
Here’s what to look for in a disability income insurance policy:
Is the policy non-cancelable and guaranteed renewable?
A non-cancelable and guaranteed renewable policy provides considerable security, since the
insurance company can’t raise your premium or cancel the policy for as long as you pay the
premiums. A policy that is only “guaranteed renewable” can increase premiums under
Definition of disability
When you buy disability coverage, you’re essentially buying the insurance company’s
definition of disability. There are three basic definitions that typically include “own
occupation” and “any occupation,” as well as “partial” or “residual” disability.
Own Occupation. This refers to the occupation you were working in just prior to your
disability. If your “own occupation” is protected, the policy will not require you to work in
another occupation. This is sometimes referred to as “regular occupation” or “your
Any Occupation. Some policies will not pay benefits if you can perform “any” occupation
you are suited to, based on your education, training and experience.
Look for a policy that considers you disabled if you cannot perform the substantial and
material duties of your own regular occupation. You can further enhance your policy with
coverage that provides benefits in the event of a partial disability.
18 RESOURCE Try our easy-to-use insurance need calculator. Visit www.principal.com/disabilitysecure.
That means your benefits are changing too!
Make sure you understand your new benefits package
and how it fits with your personal strategy for achieving
financial security. And, if possible, take advantage
of every opportunity for employer-provided benefits.
If you lose your group disability insurance or if you’re
getting a raise, consider purchasing disability income
Partial, Residual and Loss of Income Disability. Some policies will pay a proportional
benefit if you become partially/residually disabled and experience a loss of earnings. Most
companies use a “percent of income” formula to determine benefits for a residual disability.
Some policies will cover you if you can work part-time due to your disability and still do all
your regular duties – or if you can work full-time but do only part of your regular duties due
to your disability. Benefits usually begin when there has been a 20 percent loss of income
due to disability. In most cases, if you lose 75 percent or more of your income, you are
considered totally disabled.
How long is the waiting period?
The waiting period (also known as the elimination period) is the length of time you must
wait before benefits begin to be paid. It can be as short as 30 days or as long as a year. As a
rule, the shorter the waiting period, the more expensive a policy will be. It’s important to
know that benefits are typically not paid until the end of the month following the waiting
period. (If you have a 180-day waiting period, you’d receive your first benefit check after 210
days – or more.) Most people choose either a 90-day or a 180-day waiting period. Consider
your available savings and assets when making this choice.
What about guaranteed future insurability?
This means that while you are working, you can increase your policy’s monthly disability
income benefit as your salary grows – without providing evidence of medical insurability.
This feature can usually be added to the policy by rider.
Chapter 2: Understand disability income insurance 19
Get ready for changes in your financial life!
In addition to combining their incomes, the Givens sold one house,
remodeled and moved into the other, drafted their first wills, and
began laying the foundation for their new family’s financial future.
Selling one home resulted in savings of $1,100 per month
(mortgage, taxes, utilities and insurance). The Givens budgeted a
portion of this money for their insurance program, an additional
portion goes to their 401(k) plans and the remainder goes into a
savings account they call their “Annual Honeymoon Fund.”
How long will benefits last?
The benefit period is the length of time benefits are paid. The shortest benefit period
is usually two years. A five-year benefit period is fairly common. Most people purchase
coverage that lasts until age 65, or longer if available. You should buy the longest benefit
period you can afford. If you remain in good health, most companies will allow you to
upgrade your coverage at a later time.
Is there inflation protection?
Most disability insurance companies offer “cost of living” riders that help benefits keep pace
with inflation while an insured is disabled and collecting benefits.
Are premiums waived during disability?
Many policies will automatically waive your premiums during a qualified disability. They are
typically waived after the lesser of 90 days or the elimination period.
Is there a rehabilitation clause?
Since most insurance companies want to help you resume an active lifestyle and get back to
work as soon as possible, they will often offer assistance in your rehabilitation. Some policies
are based on a mutual agreement between the policy owner and the company. Other
policies limit the amount paid for rehabilitation. Make sure to review the policy, so you have
a clear understanding of the insurance company’s responsibilities – and yours.
20 RESOURCE Try our easy-to-use insurance need calculator. Visit www.principal.com/disabilitysecure.
Having a baby?
This changes everything! Or at least it did for the Martins.
David took on a second job so Stacey could be a stay-at-home
mom for the first few years. That made everything a little tighter.
But David could still afford to buy additional life insurance for his
growing family’s protection – as well as disability income
insurance, since his paychecks were even more important than
before. Their financial representative was able to customize a
program for David with both life and disability insurance that was
within their budget.
Qualifying factors for underwriting
When determining your eligibility for individual disability income insurance, insurance
companies consider your medical history, your occupational duties and your overall
+ Medical history
$ Financial history and
Chapter 2: Understand disability income insurance 21
How much disability insurance do you need?
Answer the following questions to determine your current need for disability income insurance protection. Sample
answers are provided in the second column. For an easy-to-use, self-completing version of this calculator, visit
MONTHLY DISABILITY BENEFITS AND ADDITIONAL INCOME
Group Disability Insurance Benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $___________ $2,625 net1
How much would you receive each month from your company’s group disability
insurance coverage? Be sure to deduct any income taxes that will be paid on the
benefits you receive under this coverage. Can you live on only 42% of your current
monthly income? Since group disability insurance benefits are usually taxable, even a
typical policy covering 60% of your income might not be enough.
Individual Disability Income Insurance Benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $___________ $0
Enter your monthly benefit amount. Proceeds from individual disability income
policies are typically not taxable if premiums are paid by you. Consult your tax advisor
Monthly Social Security Disability Benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $___________ $0
In most cases, this answer will be zero. For an exact figure, call 800-772-1213 toll-
free, or visit the Social Security Administration website at www.ssa.gov/planners/
calculators.htm. Do not enter an amount here if you have group disability insurance,
since those benefits would be integrated with any Social Security disability benefits
you might receive. Did you know that Social Security initially denies nearly 65% of all
Additional Household Income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $___________ $0
Add the monthly net (take-home) value of rental income, your spouse’s income,
investment returns, early IRA or pension distributions and other income sources.
Fewer than four of 10 American adults have an emergency fund to fall back on in the event
of a financial disaster.3
Total Monthly Disability Benefits and Additional Income. . . . . . . . . . . . . . . . . $2,625
Sample assumptions: Based on a $75,000 annual income, 60% Group LTD coverage and a
30% tax bracket for federal, state and FICA.
Source: Social Security Forum, Volume 21, No. 5 – May 1999 (for fiscal year 1998).
Source: Bankrate.com poll, June 21, 2006 www.bankrate.com/bos/news/sav/20060621a1.asp
22 RESOURCE Try our easy-to-use insurance need calculator. Visit www.principal.com/disabilitysecure.
Mortgage/Rent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $___________ $1,200
Even if your mortgage is paid off, be sure to consider the monthly cost of property
taxes, association fees and any other homeowner expenses. Did you know that 48%
of all home foreclosures are due to disability?4
Utilities and Household Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $___________ $350
Total what you pay each month for electricity, gas, water, telephone, cable, Internet,
trash collection and other monthly expenses.
Groceries and Household Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $___________ $500
Add up your typical monthly expenses for food and supplies. Be sure to include
Auto Payments and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $___________ $300
Include monthly auto payments, fuel, licensing fees and maintenance costs, as well
as a contingency fund for repairs.
Loans, Credit Cards and Charge Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $___________ $200
Total the amount you typically pay each month on your loans and credit cards.
Include equity loans, college loans and loans from your life insurance policies.
(Car loans and mortgage loans are included elsewhere.)
(continued on next page)
Source: Housing and Home Finance Agency of the U.S. Government, 1998.
Chapter 2: Understand disability income insurance 23
Insurance Premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Add up your current monthly premiums for medical, dental, life, auto, homeowner’s
and other types of insurance. (Do not count homeowner’s insurance if it’s included in
your mortgage payment.)
Childcare . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $___________ $500
Add the monthly costs of childcare, school lunches, special interests or events, etc.
Saving and Investing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total your monthly savings for retirement, college expenses or an emergency fund.
Other Monthly Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
How much do you spend for clothes, entertainment and other monthly expenses?
(B) $__________ $4,050
Total Monthly Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(A-B) $__________ $1,425
Your Monthly Disability Income Gap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Keep in mind, disability income insurance does not cover 100% of your income.
Your financial representative can illustrate the amount you’re eligible for, based
on current underwriting guidelines.
24 RESOURCE Try our easy-to-use insurance need calculator. Visit www.principal.com/disabilitysecure.
Buying a new home?
Home ownership is a core component of most families’ financial
security. That’s why it’s so important to build a budget for financial
protection into your new home purchase. When the Morrisons
bought their dream home in 1994, they also purchased disability
income insurance specifically to help cover the mortgage if
either of them should become too sick or hurt to work. When
Wes suffered a stroke in 1998, their disability income insurance
policy paid benefits – for nearly two years – until he was able to
return to work full-time. They were never in danger of losing their
Protect your financial future
If you become disabled and are unable to work, your family loses not only your income, but
also any savings that would have been invested for retirement. You may even have to spend
some savings to make up for the income shortfall. Disability income insurance can help
replace the gap between your current resources and your financial goals.
To calculate your insurance gap, use the worksheet on pages 22-24 or visit our easy-to-use
insurance need calculator at www.principal.com/disabilitysecure.
Disability Income Gap
Disability Income Sources $2,625
Graph based on a $75,000 annual income ($4,375 after-tax monthly
income), 60% group LTD insurance coverage, 30% tax bracket for
federal, state and FICA and assumptions from the sample scenario on
Chapter 2: Understand disability income insurance 25
I can do it myself
Truth is, it makes sense to work with a financial representative.
• Financial representatives are trained to help you assess your insurance needs, your
overall financial situation, your tolerance for risk and the type (or types) of insurance
that would be most appropriate for your personal situation.
• He or she will help you understand the complexities of disability income insurance
policies and riders – and will help you select the features and benefits that are right
• A financial representative may be a catalyst in the planning process – bringing together
any other advisors you may have, such as your attorney or accountant – then helping
form a coordinated planning team.
• He or she will complete the forms necessary to start the underwriting process – and will
arrange for any follow-up information that may be required. Then he or she will follow up
with the underwriters to facilitate the process.
• When the policy is issued, your financial representative will usually deliver it in person,
explain the coverage and answer any questions you might have.
• He or she will continue to review your changing needs and will be available to help with
any service needs that may arise over time.
• In the event of a disability, your financial representative will be a great resource to you
and your family – helping you file a claim.
Review your plan regularly
Change is the one great constant in life. That’s why it’s so important to
regularly review your objectives, your plan and your financial protection
strategy – at least once a year. Did your job or income change? Did you
get married or have a baby? Did someone in your family die?
Now that you’ve taken the time to create a plan for financial security, you need to make sure
your plan, as well as the protections you’ve put in place, remain in line with your changing
goals and your changing life.
Pick a day you’ll remember
Pick a day – each year – to trigger a call to your financial representative to set up an
appointment. It could be your birthday, your anniversary, a child’s birthday, April 15th – any
date that you will easily remember. Take a moment, now, to mark that date on the calendar.
You can also ask your financial representative to call you every year on that date.
Some things demand immediate attention
Whenever a major life-changing event occurs, you should contact your financial
representative for a review.
• Marriage or divorce • Major increase in debt, including the
purchase of a new home
• Birth or adoption of a child
• Paying off the mortgage
• Children graduating from college or
leaving home • New job or promotion
• Inheritance or other windfall • Death of a spouse
• Changing a beneficiary
28 RESOURCE Try our easy-to-use insurance need calculator. Visit www.principal.com/disabilitysecure.
What your review may discover:
1. You’re well protected. Your disability income insurance program is working
as planned. There have been no major changes since the last review.
2. Your situation has changed and your coverage can be adjusted to reflect
the change. For example, some disability income insurance policies allow you to
increase coverage at predetermined times, without having to provide proof of
insurability. Your coverage can also be increased at any time with full underwriting.
A Principal From Here to Security ReviewSM
For more than a century, associates of Principal Life have worked to help people better
understand their changing financial protection needs. We have incorporated this
experience into a program called the Principal From Here to Security ReviewSM. The
program is another valuable tool that enables your financial representative to work
closely with you to explore potential changes and additions to your overall financial
1. Collect all the documents related to your financial plan and insurance protection and
store them in a safe place (like a safe deposit box).
2. If you haven’t already done so, you should contact your attorney and draw up a will.
3. Next, establish a regular schedule for reviewing your plan, your investments and your
financial protection strategy with your financial representative. After all, the only thing
constant in life is change!
Principal Life and your financial representative can help you through this process with
our Principal From Here to Security ReviewSM.
FOR MORE INFORMATION
Contact your local financial representative or visit www.principal.com/
Chapter 3: Review your plan regularly 29
Glossary of insurance terms
Age Limits CERTIFIED FINANCIAL PLANNERTM (CFP®)
Most policies have limits on the age of the A professional credential awarded by CFP
insured. Most have maximum issue ages. Board of Standards for successfully
Some have minimum ages. And some have completing a curriculum of insurance and
a combination of maximum and minimum financial planning concepts.
Chartered Financial Consultant (ChFC®)
Agent A professional designation for successfully
An authorized representative of an insurance completing a curriculum of insurance and
company who sells and services financial planning concepts through the
insurance policies. American College.
Application Chartered Life Underwriter (CLU®)
A series of questions that give the insurer the A professional designation for successfully
information necessary to effectively assess completing a curriculum of life insurance-
the risk. By signing the application, the related concepts through the
proposed insured certifies the accuracy of American College.
the information. The application becomes a
Cost of Living Rider
part of the policy at issue and may be used
Also called the “Cost of Living Adjustment
to determine the validity of a claim in the
Rider” – can be added to a policy to help
case of misrepresentation or misstatement
benefits keep pace with inflation, when the
insured is disabled and receiving disability
Any Occupation benefits for more than a year.
Definition of disability whereby the insured
will receive benefits only if, due to a
An illness or injury that prevents a person
qualifying disability, he/she is unable to
from working and earning an income.
engage in any occupation which he/she is
reasonably qualified for based on education,
training or experience.
Monthly benefit for a qualifying disability.
The length of time benefits are paid if
disabled according to the policy.
30 RESOURCE Try our easy-to-use insurance need calculator. Visit www.principal.com/disabilitysecure.
Disability Income Associate (DIA) Guaranteed Future Insurability
A Health Insurance Association of America Policy provisions and/or riders that allow the
(HIAA) designation acquired upon insured to increase coverage amounts at
satisfactory completion of specific specified intervals, ages or as income
coursework. Recipients demonstrate increases, without additional medical
a fundamental understanding of the role underwriting or proof of insurability. Such
disability income insurance plays within provisions are typically available for an
the health care continuum – as well as in additional premium.
retirement, estate and long-term care
Guaranteed Renewable Policy
planning – in protecting individuals from
A policy in which coverage is guaranteed to
the financial losses often associated with
a specified age as long as premiums are
disabling injuries or illnesses that prevent
paid. The premium could be changed by an
them from working.
insurer for a certain class of individuals.
Disability Income Insurance
Insurance that provides monthly benefits
A clause that generally allows the insurance
when you are unable to work due to a
company to contest the payment of a
disabling illness or injury.
benefit for up to two years from issue for
Elimination Period misstatements in the application. Fraud and
Also known as the “waiting period” – the misrepresentation are generally not
length of time during a qualifying disability protected by an incontestable clause and
you must wait before benefits are paid. may be contested even after the two-year
period has expired.
Evidence of Insurability
A requirement for potential insureds to Insured
provide proof of medical, occupational and Individual who is covered by the
financial insurability before purchasing a insurance policy.
disability income insurance policy.
Grace Period The insurance company issuing the
A period (usually 30 or 31 days) following insurance policy.
each insurance premium due date, other
than the first due date, during which an
An insurance policy terminated at the end
overdue premium may be paid. All
of the grace period because of nonpayment
provisions of the policy remain in force
throughout this period.
Level Premium Policy
A premium that is guaranteed not to The printed document issued to the policy
increase for a stipulated period of time. owner by a company stating the terms of
the insurance coverage.
Long-Term Disability (LTD) Insurance
Group disability coverage provided by an Policy Illustration
employer for employees, which typically A policy illustration generally illustrates
provides benefits for two years or longer. premiums, benefits and other information
about the policy.
National Association of Insurance
Commissioners (NAIC) Premium
An association of the various state insurance The payment, or one of regular periodic
commissioners, who collaborate to codify payments, that a policy owner makes to
certain insurance laws and regulations. own an insurance policy.
Non-Cancelable and Guaranteed Rated Policy
Renewable Policy A policy that has been issued with additional
A policy that cannot be changed or canceled premiums as the result of unfavorable
except for nonpayment of premiums – nor underwriting characteristics of the insured.
can the policy premiums be increased before For example, the proposed insured may
age 65, regardless of changes in income, have a medical condition not serious
occupation or health. enough to decline the policy, but which
creates additional risk for the insurer.
Definition of disability that typically means Regular Occupation
the insured will receive benefits if he/she is Definition of disability that typically means
unable to perform the duties of his/her the insured will receive benefits if he/she is
regular (or “own”) occupation due to a unable to perform the duties of his/her
qualifying disability. Also known as “regular regular (or “own”) occupation due to a
occupation.” qualifying disability. Also known as “own
The insured is unable to perform some of Rehabilitation Benefit
the duties of his or her occupation. A provision in a disability income insurance
policy that typically allows for additional
benefits if the insured takes part in a
32 RESOURCE Try our easy-to-use insurance need calculator. Visit www.principal.com/disabilitysecure.
Reinstatement Supplemental Disability Coverage
The restoration of a lapsed insurance Individual disability income insurance is
policy. The company requires evidence sometimes referred to as “supplemental
of insurability and payment of past- disability coverage” when it is wrapped
due premiums. around group long-term disability insurance.
Residual Disability Total Disability
The insured is able to perform some, but Solely due to a disabling illness or injury,
not all, of the duties of his or her job or the an insured is unable to perform the duties
insured’s ability to work is restricted and, of his or her occupation or any other
as a result, has a loss of earnings. occupation he or she is qualified to do
based on education, training or experience.
An amendment to an insurance policy Underwriting
that modifies the policy by expanding or The process of classifying applicants for
restricting its benefits or excluding certain insurance by identifying characteristics
conditions from coverage. such as age, gender, health, occupation
Short-Term Disability Income Insurance
Group disability coverage provided by an Waiver of Premium
employer for employees. It provides benefits Under this provision, premiums are typically
for a short period of time, typically three to waived after the lesser of 90 days or the
six months. elimination period for the duration of
disability coverage in the event of a
qualifying disability. This is typically a
A federal program that provides retirement,
provision included in the policy at no
disability and survivor benefits to
State and federal law mandating that
A category of risk which meets the
employers compensate employees for the
underwriter’s definition of standard
financial loss of a disability due to
or favorable risk.
occupational injury or illness. (Applies to
most jobs; some exclusions in certain states.)
See “Rated Policy.”
WE’LL GIVE YOU AN EDGESM
While this communication may be used to promote or market a transaction or an idea that is discussed in the publication, it
is intended to provide general information about the subject matter covered and is provided with the understanding that
The Principal is not rendering legal, accounting, or tax advice. It is not a marketed opinion and may not be used to avoid
penalties under the Internal Revenue Code. You should consult with appropriate counsel or other advisors on all matters
pertaining to legal, tax, or accounting obligations and requirements.
Policy and rider descriptions are not intended to cover all restrictions, conditions or limitations. Refer to policies and riders for
full details. Policies and riders are subject to state availability. Some riders are subject to an additional premium.
Disability insurance has limitations and exclusions. For costs and details of coverage, contact your Principal Life financial
representative. Insurance issued by Principal Life Insurance Company. Principal Life is a member of the Principal
Financial Group®, Des Moines, IA 50392.
JJ 1131-3 | 8/2006 | #5733082008